This crisis followed a period, from 2002-2004, when monetary policy had done too much heavy lifting. The US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily. With households now struggling with this remaining debt, should we expect them to spend beyond their means again, or ask them to do so?

Moreover, if consumers are now going to want fewer houses and cars, a significant number of jobs will disappear permanently. Workers who know how to build houses, or to sell or finance them, will have to learn new skills. This means resources have to be reallocated into other sectors to ensure a robust recovery, not simply a resumption of the old binge. But this will not necessarily be facilitated by ultra-low interest rates. [Emphasis added.]

Krugman then says the following:

If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.

Boushey, rather more usefully, adds the following:

Certainly, construction has lost a significant chunk of jobs, but other industries — manufacturing, professional and business services, transportation and warehousing, financial activities, leisure and hospitality, and information services — have all lost a larger share. Much of financial activities could be considered tied to the run-up and bust of the housing market, but all the others? This Great Recession has had fairly broad, widespread job losses across industry, which contradicts the idea that there’s one or two sectors that U.S. workers need to transition out of.

To Boushey’s credit, she acknowledges that the housing market is more than the construction sector. But I’d suggest that Krugman and Boushey are missing the point, and Rajan didn’t improve matters by focusing narrowly on housing and cars.

You don’t have to be a devotee of the Austrian school to recognize that a variety of factors — monetary factors, but also implicit and explicit subsidies — can lead to overinvestment in certain sectors and skill sets. As Eric Brynjolffson and Adam Saunders argue in Wired for Innovation, our economy has experienced a number of structural changes that make jobless recoveries more likely across many sectors. The main driver of productivity growth is investment in organizational capital. In IT-intensive sectors, there is much wide variance in performance across firms, an artifact of a wide variety of organizational strategies, some successful and others less so. In an interview with strategy + business, Brynjolffson offered the following:

Many of the laid-off workers will not be hired back into the same jobs when the economy recovers. Those spots on the assembly line or behind the desk are gone forever, made superfluous by technology-enabled restructuring. Instead, people will need to find new jobs, in new companies and even new industries. That takes people a lot longer to sort out than simply going back to business as usual; hence, we can expect longer periods of unemployment.

Unlike Rajan, Brynjolffson is very concerned about the threat of deflation and he advocates aggressive monetary expansion. And those are views shared by many people who nevertheless believe that we’re undergoing major sectoral shifts. But his arguments cut in the same direction as Rajan’s on the question of whether there is a monetary quick fix for these sectoral shifts.

Rajan writes:

The bottom line is that the current jobless recovery suggests the US has to undertake deep structural reforms to improve its supply side. The quality of its financial sector, its physical infrastructure, as well as its human capital, all need serious, and politically difficult, upgrades. If this is our goal, it is unwise to try to revive the patterns of demand before the recession, following the same monetary policies that led to disaster.

None of this is to say that the Fed should jack up rates without warning, or to extremely high levels. Policy at times of unusual uncertainty should never be extreme. But this is precisely why, when the jitters about Europe recede, it would be prudent for the Federal Reserve to set the stage for raising rates from ultra-low to the merely low. [Emphasis added.]

I wish that Rajan were more specific. Yet my sense is that he is making a reasonable point, which is that we don’t want to revive the old patterns of demand.

If we bracket the monetary policy question, we could at the very least pull back subsidies from the housing sector and, to the extent possible, across the wider economy, from the Export-Impact Bank and agriculture and other sectors. Because again, the problem isn’t just housing and cars: obsolete firms and jobs are laced throughout the economy, and we should, to the extent possible, facilitate the process of liquidation and retraining. This is why the “cash-for-cuts” concept is so important. The goal is not to attack the public sector workforce. Rather, it is to create opportunities for efficiency gains by reforming compensation schemes.